TECHNICAL EXCELLENCE

THE VARIABLE CAPITAL COMPANY

THE VARIABLE CAPITAL COMPANY

ARMIN CHOKSEY

A FLEXIBLE VEHICLE FOR INVESTMENT FUNDS

Singapore is viewed globally as a preeminent asset and wealth management centre in Asia Pacific, with a robust regulatory framework and business-minded government; it also provides an entry point to the region. Nevertheless, the fast-changing environment globally as a result of regulatory and other dynamics has put increasing pressure on financial centres such as Singapore to continually up its game and re-invent itself to remain at the forefront of the industry. In recent years, there has also been an increasing trend towards setting up Singapore-domiciled investment vehicles. This is primarily driven by the fact that Singapore offers a place where substantive fund management activities and investment vehicles can co-exist.

Prior to the introduction of the variable capital company (VCC), Singapore did not have a corporate form sufficiently flexible to accommodate an investment fund vehicle which caters to the specific needs of mutual funds, hedge funds, private equity, real estate and infrastructure funds. Currently, Singapore offers a variety of investment fund forms, for instance, limited partnerships, unit trusts, business trusts, and real estate investment trusts. Corporations are also used as investment subsidiaries for “fund” investments. The addition of VCC to this suite of legal entities, which can be used as a vehicle for investment funds, is key to elevating Singapore’s value proposition as a competitive asset management hub in the region. Corporate form funds are not a novelty in Singapore, as most private equity and real estate funds today are already using some form of Singapore corporate entity as investment subsidiaries within their fund structures. Further, over 70% of offshore funds sold in Singapore are corporate form funds that are domiciled in foreign locations.

HOW DOES THE VCC WORK?

Registration and incorporation

A VCC would be incorporated by the Accounting and Corporate Regulatory Authority (ACRA), and supervised by the Monetary Authority of Singapore (MAS) directly through the Securities and Futures Act (SFA) as pertaining to funds, and indirectly through the regulatory oversight of the fund managers.

Corporate structure

The VCC legislation is separate and distinct from the legislation that governs existing Singapore companies. This would “future proof” VCCs against any unintended consequences arising from changes in the Companies Act. The VCC can hold a single asset and as such, would not be required to diversify its investments unless required under the SFA. A VCC can be used as a vehicle for both traditional funds and alternative funds, such as hedge funds, private equity funds, real estate funds and infrastructure funds. The share capital of a VCC will always be equal to the net asset value of the VCC. The assets and liabilities of the VCC shall be measured and evaluated on a fair value basis at all times.

Fund manager

A VCC cannot be self-managed. It must be managed by a fund management company duly registered or licensed by MAS under SFA. In addition to being able to set up as a standalone fund, a VCC can be established as an umbrella structure with multiple sub-funds and share classes. The umbrella VCC would have provisions for the segregation of assets and liabilities between sub-funds, such that the assets of one sub-fund may not be used to satisfy the liabilities of another sub-fund.

Shares and debentures

A VCC can issue debenture stocks, bonds or other securities. Such instruments may be listed on a stock exchange. The liability of members of a VCC will be limited to the amount, if any, unpaid on the shares held by them respectively. A VCC may issue shares of varying amounts and issue at times for payment of calls as agreed between its shareholders. It can accept members without having its shares fully paid up and can pay dividends in proportion to the amount paid up on each individual share such as when a larger amount is to be paid on some shares than on others. A VCC is not required to disclose its register of shareholders to the public, but must make the register available to supervisory and law enforcement agencies.

Accounts, reports and audits

The financial statements of a VCC can be prepared under different accounting frameworks (example, IFRS, Singapore FRS and US GAAP), and can be prepared at each individual sub-fund level. Authorised VCCs will be required to use Recommended Accounting Practice 7 Reporting Framework For Investment Funds, as it is currently applicable for unit trusts under the Code on Collective Investment Schemes (CIS Code).

The Board of Directors of a VCC can also elect to dispense with the need to hold annual general meetings.

The VCC shall lodge an Annual Return with ACRA after its general meeting within seven months from the end of its financial year-end. A VCC must have a qualified company secretary and must have a registered office in Singapore.

Custodian

A VCC is required to safeguard its assets, entrusting a “custodian” unless exempted. For Authorised VCCs, the custodian must be an approved CIS trustee under SFA. Such custodians must comply with the CIS Code, which will set out the operational obligations for custodians of the Authorised Scheme.

For VCCs which comprise restricted or exempt schemes, the custodian must be a specified custodian as defined under the VCC Act or also a custodian outside Singapore which is authorised to act as a custodian in the country or territory where the account is maintained. VCCs which comprise restricted or exempt schemes that are private equity, real estate or venture capital funds may be exempted from requiring a custodian.

Directors

It must have a minimum of one director who is ordinarily a resident in Singapore. The sole director can also be a sole shareholder of the VCC. A VCC must have at least one director who is also a director or qualified representative of the fund management company that will be managing the VCC. VCCs consisting of Authorised Schemes would require at least three directors, of which at least one director has to be independent.

Winding up a VCC

Members of the VCC may choose to wind up the VCC voluntarily. The process of a voluntary winding up will commence by calling a meeting of the VCC to pass a special resolution for winding up. The resolution must be shared with ACRA as well. Alternatively, the VCC may be wound up by the court.

When winding up a sub-fund, all shareholders of that sub-fund should redeem their shares (where appropriate) and the VCC shall be required to submit an application to MAS to be de-authorised.

The VCC will be treated as a company and a single entity for tax purposes. Consequently, the VCC is subject to income tax in Singapore. However, the tax exemption under sections 13R (referred to as “Singapore Resident Fund Scheme” or “SRF”) and 13X (referred to as “Enhanced-Tier Fund Scheme” or “ETF”) of the Income Tax Act of Singapore will be extended to VCCs. The new provisions for umbrella VCCs provide benefits for such structures, since the conditions for the tax exemption schemes are applied to an umbrella VCC as a whole.

Redomiciliation

A foreign CIS, organised as a body corporate, can be redomiciled to Singapore as a VCC. The requirements for redomiciliation for a VCC are different from those in the Companies Act.

IMPLICATIONS FOR THE INDUSTRY

The conception of the VCC is a result of much industry analysis and feedback over the last few years, which subsequently led to a legal study to develop the legislation. This is testament to MAS’ reputation of being a pragmatic and innovative regulator.

It has long been the vision and mission of Singapore to introduce a versatile and fungible legal entity form that can be used for investment business in whatever form. Therefore, it is also envisioned that the next steps to developing Singapore’s financial services industry would entail studying the applicability of VCC on other sub-industries within the asset and wealth management sector, such as real estate investment trusts, securitisation and insurance products.